Detroit celebrates, but concerns lie ahead

Strong US sales have buoyed General Motors, Ford and Chrysler, but with the home market slowing their international concerns will become more pressing.

Despite a flat December, US motor vehicles sales posted a healthy 8% rise in volume during 2013 as a whole, effectively completing a recovery from their 2009 nadir. Some 15.6m cars and lorries were sold last year, the largest number since 2007. The market is expected to continue expand in 2014, but at a much slower pace, reaching 16m in sales. But while their home market is expected to be stable and profitable, the Detroit Big Three will face global challenges that may impact their strategies in the US, as well.

Last year probably marked the point when the US auto market achieved a sustainable balance. In the mid-2000s, sales were inflated by overly generous incentives and easy credit, reaching the 17m milestone. The collapse during the global financial crisis was also overdone: annual sales dropped by a third in 2008-09 and have still not quite made up the lost ground. The Detroit Big Three were especially hard hit by the crisis, but they have now regained stable market shares, helped in part by the quality and production problems suffered by their Japanese competitors.

Market stability

Market shares of big-volume producers have now been set. GM suffered a modest loss of market share during 2013, while Chrysler and, especially, Ford, did well, outpacing growth in the overall market. Among Japan’s Big Three, Nissan saw a small market share increase, whereas Toyota and Honda lagged marginally behind.

Some of the sources of sales growth seen during 2012-13 will peter out this year. For example, big pickup trucks were in high demand due to heightened activity in the construction industry. Construction activity may now slow down and, in any case, pent-up demand for such vehicles has been largely sated.

Going forward, still-high unemployment and job insecurity will be a deterrent to purchasers, while the likely curtailment of the bond-buying programme by the US Federal Reserve could push loan rates higher. In theory, the fact that the average car on the road is now 11.5 years old means there is pent-up demand, but in reality that is more a testament to the quality of modern vehicles.

On the other hand, the trend away from compact and subcompact vehicles will likely endure, since petrol prices in the US have stabilised and may even decline thanks to increased domestic oil output. This could help carmakers maintain profitability, since larger cars, sports utility vehicles (SUVs) and light lorries offer higher profit margins. All these trends should help carmakers avoid costly price wars and discounting.

Difficult global markets

However, the US market is only part of the Detroit Trio’s global operations. Even Chrysler, which relies on the home market more heavily that the other two, is since last week wholly owned by Italy's Fiat. Fiat will likely list its shares in New York in 2015, loosening its own ties with Italy and the troubled European market. However, for political as well as economic reasons the joint company will still have to deal with Fiat plants in Italy, which are working at less than half of their production capacity. It will also have to narrow Fiat’s losses, which in the first half of 2013 measured €501m (US$650m).

In addition to troubles in Europe, Fiat also faces difficulties in Brazil, where it is a market leader. Last year, Brazil suffered its first drop in sales in a decade, as sales volumes fell by 0.9%. No speedy rebound is expected in 2014.

General Motors is also exposed to Brazil, but Mary Barra, who will replace Dan Akerson at GM’s helm as of January 15th, will face her most pressing headache in Europe. In December, GM announced yet another change in its strategy in the region, where it lost US$1.8bn in fiscal 2012 (year-end December 31st) and probably suffered another loss last year. GM will no longer sell its Chevrolet marque and will concentrate on improving the performance of its Opel-Vauxhall subsidiary.

Ford has been the most successful US automaker in recent years, and 2013 was no exception. Its F-Series lorry was the best-selling vehicle in the US market, with over 760,000 units sold during the year. Largely due to its success, Ford boosted its unit sales by 11%, increasing its market share substantially. The company is enjoying a 9.5% profit margin in its US operations, despite suffering a costly recall. It doubled the dividend on its common shares, to US$0.4 per share.

However, its share price dropped by a dramatic 6% in mid-December when Ford announced a lower profit target for fiscal 2014 (year-end December 31st), associated in particular with enduring weakness in Europe. Brazil is a problem too, since Ford is the fourth largest seller in the Brazilian market. Even though Ford is seeing strong growth in China, it is still far from catching up with market leaders.

An improvement ahead?

The crisis in Europe appears to be bottoming out. Auto sales in the UK have already reached pre-crisis levels, after an 11% gain in 2013. Continental Europe is seeing some improvements at last, even though it is still a long way from a bona fide recovery.

Still, even a modest increase in sales will alleviate pressures on all three US automakers. Fiat will be the most immediate beneficiary, but others will gain as well. Ford has been restructuring and cutting costs in Europe as part of its 2013-14 programme, which will cost around US$800m and entail the closure of three plants. GM is in the midst of a US$5.25bn investment programme which will run through 2016 and include the introduction of 23 new Opel-Vauxhall models. By then, the Detroit giant intends to be in the black in its European operations for the first time since 1999.

China, however, could emerge as a big problem, especially for GM. The Chinese market grew strongly last year, with sales reaching 20m units. However, GM suffered an across-the-board decline in unit sales in December and lost its market-leading position for the year as a whole to its rival, Germany's Volkswagen. GM also saw sales weaken in the US during the same month.

Meanwhile, other global companies are moving in to compete, including both Ford and Chrysler. Moreover, competition is increasing. Sales of Japanese vehicles were hurt in recent years by the strong yen and a territorial dispute between the two countries, benefiting such market players as GM and VW. Now, however, Japanese brands are starting to see an improvement in sales. Even more alarming for the longer term, indigenous Chinese automakers are starting to come into their own as far as quality, styling and marketing acumen is concerned. The government in Beijing has long talked about creating national champions in the automotive industry, and the day when it happens is drawing near.

Moreover, concern is emerging about the pace of China’s economic growth. The authorities have finally become alarmed by the explosive growth of credit in the Chinese economy. Loans have jumped by 75 percentage points since 2008, to measure some 200% of GDP. The government has issued new regulations designed to curb growth in the shadow banking industry, which is likely to slow the expansion of domestic consumption, as well - at least in the near term. GM, Volkswagen and other global automakers gearing up to boost production in China may have to alter their calculations, which will inevitably impact their strategies in the US market.